Neartermed risk, economy, and the Commodity megacycle

November 25, 20225 Comments

Today I will build a case for some neartermed selloff on the US markets. I’ll also present an outlook by an economic research firm who I trust and use. Finally, lets look at the uber-long stocks vs commodities performance chart to see what we may be in for over the coming (many) years.

The VIX pattern suggests some neartermed downside

The chart below suggests a rising VIX coming off of the rounded swing-pattern over the past year. The level of 20 implies a return of the VIX to near 40. This, in turn, implies a selloff on stocks.  For neartermed traders who feel the market may rise to the end of the year, this might become an entry point. Assuming we get that pullback.

With the Thanksgiving rally finishing up…Here’s a pattern that backs that chart from BearTraps:

Meanwhile, back at the ranch…my neartermed trading indicators (Bollinger Bands, Stochastics, RSI) on the daily SPX chart show two out of three indicators getting overbought. RSI isn’t too overdone. Close enough to past points of inflection though…perhaps, given the VIX notes above, and the chart below, we should keep an eye open for a pullback.

Inflation is propping up…and hurting the economy

I’m no economist, so I turn to independently reliable (no bias) institutional level research to get my economic intel. One such service we use is MarketDesk Research. Here are their headlines today, hot off the press:

  • It is extremely difficult to separate the fluff (i.e. inflation) from the real data. There is a strong case to be made that inflation is offsetting declining sales volumes and overstating economic strength. The market is cheering lower inflation readings, but it should be careful what it wishes for. Easing inflation is likely to reveal the hidden impact of Fed tightening: declining volumes and weaker demand.
  • Inflation is propping up economic data (more money) painting picture of strong demand and robust activity. However, inflation is also chipping away at DEMAND as goods and services become more expensive.
  • The U.S. economy’s trajectory remains unchanged. Consistent with the prevailing trend this year, economic data continues to decelerate and signal slower growth ahead. It is not a sharp slowdown, but 2021’s rapid pace of growth is steadily giving way to a more normal level of activity. Taking stock of the economy today, the biggest uncertainty is what lagged impacts are already in motion due to Fed tightening.
  •  Our view is the transmission of Fed policy into the economy and financial system is occurring quicker this cycle. Housing data supports this thesis of faster transmission as housing activity grinds to a halt. Our view remains that areas outside of housing will start to show the effect of tighter policy in coming quarters.

Pivot

Given what MarketDesk suggests, that may imply recession and a “pivot” by the Fed sooner than may be thought. A pivot doesn’t mean a decrease in rates. It can mean a slowdown in the pace (aka 0.5% in December, then 0.25% in January). That may, or may not, be considered a positive by the market. As a technical guy, I only become outright bullish if the SPX breaches last peak of 4300. All else is noise.

Brooke Thackray presents an argument for a Fed pivot in January here. BTW – his new 2023 Thackray’s Investors Guide is now out. Its an important book to keep on your desk. I’m not associated with Brooke, I mention the book because I use it myself.

Commodities mega cycle?

I copied this chart courtesy longtermtrends.net, and then added my own trendlines and frowny faces (representing stock investors). It’s looking at the S&P 500 relative to the commodity market index PPI (Producer Price Index). When the ratio rises, stocks beat commodity returns – and when it falls, commodities beat stock returns.

From Longtermtrends:

“Stocks perform better in late recessions and early expansions while commodities overperform in late expansions and early recessions. Furthermore, Bannister and Forward (2002) found that equities and commodities alternate on leading the market on average every eighteen years (18-year cycles), which also corresponds to deflationary and inflationary cycles.”

My take: We’re likely just starting on this cycle. 

 

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